Explaining the Earned Income Credit
By Tim Frye
One of the biggest components in the amalgamation of skills it takes to be an expert at tax preparation is the knowledge of the credits that create the largest refunds. After all, isn’t your client or anyone for that matter, looking for the biggest bang for their buck? Well in the world of income taxes that means your client is looking for the biggest refund. The earned income credit is one of the more refundable and substantial credits that can create that very favorable outcome for your client: The gargantuan refund. Here are a few pointers to assist in articulating the specifics on the earned income credit to your client.
Purpose of the EITC
The Earned Income Credit was created in 1976 by jimmy carter as a part of his tax reformation plan as an anti-poverty program, directed towards those who are working hard but not taking home fat paychecks. The EITC pays out more than 250 million dollars a year to low income households who can report earned income on their tax return. It is also one of the most perpetrated avenues when it comes to fraudulent attempts to gain the benefits of this credit, so a tremendous amount of due diligence and corresponding knowledge of the credit’s contingencies are being asked of a modern day tax preparer.
Who Doesn’t Get the EITC?
It might be easier when attempting to discern who gets the Earned Income Credit to look at who doesn’t get it and go from there. In order to receive this credit the taxpayer must be U.S. citizen, and must have earned income. Also, to be a qualifying child for the purposes of gaining access to the very generous EITC, the dependent must either be under the age of 19 as of the last day of the tax year, or a full time student and under the age of 24 on the last day of the tax year. The parameters of this credit can certainly get more complicated from there, but for the sake of time and your sanity we enact a bit of brevity for the moment.
EITC Not Founded Upon AGI
As a tax preparer you will soon find that most of the phase outs and phase INS of the credits available to your client are mostly based on their Adjusted Gross Income, or AGI. This number is essentially the taxpayer’s gross income minus any applicable adjustments such as alimony paid, student loan interest, qualifying tuition expenses, etc. It is vital to note that the Earned Income Credit is not based on Adjusted Gross Income, but instead is framed by the taxpayer’s earned income amounts. The EITC is the largest and most generous of the refundable credits that are offered to taxpayers now a days, so it would be tantamount to your progress as a tax preparer to be ignorant of its aspects.
